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10-Year Treasury yields could get to 4% ‘in a hurry,’ bond fund manager predicts

While Wall Street braces for 10-Year Treasury yields to tick over 3 percent, one bond expert believes that will feel like a piece of cake compared to what may come next.

Sit Investment Associates' Bryce Doty believes investors are in "denial" over how high rates could go this year and the painful impact it could have on stocks.

"We didn't pierce 3 percent this time, but the next 10-Year auction in a couple of weeks is probably certain to do that," he said recently on CNBC's "Futures Now." "I think it's going to just keep going. 10, 20 basis points a month gets you to 4 percent in a hurry."

With the 10-Year Treasury yield trading at four-year highs, Doty notes the bond market is now leading the stock market. Thus, he says, another significant leg down for stocks could be imminent.

"Typically, the stock market has sold off and has created a flight to quality and has driven yields down," he added.

"Everything has changed. You now have the stock market reacting to an uptick in yields and bonds rather than the other way around," Doty stated. "So, I think it's going to take investors a while to re-calibrate that reality."

Doty, a senior portfolio manager at Sit, runs the RISE ETF, which is designed to profit from rising rates. His strategy right now is to short bond futures in order to "turn the fear into cheap insurance."

Doty calls the environment "surreal" — pointing to the Federal Reserve's intention to keep unwinding a $14 trillion dollar trade. It comes as debt issuance builds to cover exploding budget deficits, sparked by a combination of higher spending and new tax cuts that some analysts warn could make the problem worse.

"It's dangerous at worse, and uncertain at best," he said.

According to Doty, the Fed should have worked on clearing the balance sheet before risking getting too aggressive on raising interest rates. Now, it may be too late to prevent inflation from eating into companies' bottom lines.

Doty predicts the Fed will lift rates four times this year. That's one hike more than the Fed's official forecast.

"If they stop now, what kind of message does that send? It makes people think 'Oh, the economy is going into the tank.' But, no one believes that," Doty said. "So, then they lose credibility. It's a tough, tough corner they've painted themselves into."

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